Quick Facts

Nepal’s agriculture-dominated economy lacks the entrepreneurial dynamism needed for broad-based growth. A statist approach holds development far below the country’s potential. Government interference continues to hurt regulatory efficiency, and there has been little effort to modernize the trade and investment regimes.

Economic Freedom Snapshot

2016 Economic Freedom Score: 50.9 (down 0.4 point)

Economic Freedom Status: Mostly Unfree

Global Ranking: 151st

Regional Ranking: 34th in the Asia–Pacific Region

Notable Successes: None

Concerns: Rule of Law, Open Markets, and Labor Freedom

Overall Score Change Since 2012: +0.7

Political instability still undermines the fragile rule of law. Property rights are poorly protected by the inefficient judicial system, which is subject to substantial political influence. Systemic corruption and a non-transparent legal framework continue to obstruct much-needed expansion of private investment and production.

Background

Nearly 10 years after the end of a Maoist insurgency and abolition of the monarchy, Nepal finally passed a new Constitution on September 20, 2015, establishing the country as a federal republic and redrawing political boundaries. Ethnic Madhesis, who live in the southern plains of Nepal and have close links to India, have objected to the Constitution and taken to the streets in protest, leading to sporadic street clashes that have killed nearly 40 since August. Trade between Nepal and India has dropped dramatically since the adoption of the Constitution, causing a fuel crisis in Nepal and forcing it to look to China as an alternative supplier. A poor, landlocked country bordering the Himalayan Mountains, Nepal attracts little foreign direct investment. A devastating earthquake on April 25, 2015, killed more than 8,500 and injured 18,000. The international community has pledged nearly $423 million in assistance, but the government estimates that it will cost around $7 billion to rebuild.

Although corruption remains endemic in Nepali politics and government, a spirit of national unity after two 2015 earthquakes moved the deeply divided political parties to make encouraging progress in drafting a new constitution that could improve the rule of law. Graft has been particularly prevalent in the judiciary and the police force, which reportedly is extensively involved in organized crime. Property rights are not protected effectively.

The top individual income and corporate tax rates are 25 percent. Other taxes include a value-added tax and a property tax. The overall tax burden equals 15.3 percent of total domestic income. Government spending amounts to 17.2 percent of GDP. The budget balance has been in deficit, with public debt around 25 percent of GDP. Spending on subsidies, particularly to state-owned enterprises like the Nepal Oil Company, continues.

Nepal’s average tariff rate is 14.7 percent. The government relies extensively on tariffs for revenue. Some goods may be subject to export taxes, and beef imports are restricted. The government screens new foreign investment. Several state-owned enterprises distort the economy. The financial sector remains fragmented, and government ownership and influence in the allocation of credit remain substantial.